What are the grand dynamics that drive the accumulation and distribution of capital? Questions about the long-term evolution of inequality, the concentration of wealth, and the prospects for economic growth lie at the heart of political economy. But satisfactory answers have been hard to find for lack of adequate data and clear guiding theories. In this work the author analyzes a unique collection of data from twenty countries, ranging as far back as the eighteenth century, to uncover key economic and social patterns. His findings transform debate and set the agenda for the next generation of thought about wealth and inequality. He shows that modern economic growth and the diffusion of knowledge have allowed us to avoid inequalities on the apocalyptic scale predicted by Karl Marx. But we have not modified the deep structures of capital and inequality as much as we thought in the optimistic decades following World War II. The main driver of inequality--the tendency of returns on capital to exceed the rate of economic growth--today threatens to generate extreme inequalities that stir discontent and undermine democratic values if political action is not taken. But economic trends are not acts of God. Political action has curbed dangerous inequalities in the past, the author says, and may do so again. This original work reorients our understanding of economic history and confronts us with sobering lessons for today.
Probably you're familiar with the basic argument. First, 1) the period from WWI to the 1970s, where capital stock was greatly decreased by shocks like the wars and the depression, as well as the relatively egalitarian policies that followed, and where economic growth and wage income increased faster than invested wealth or property values, was a historical outlier, and that we are now returning to something more like the nineteenth century in terms of the concentration of wealth and its impact on society. (This book's central topic, to be clear, is "Inequality," which easily could have been the title.)
With reams of data, magnificently processed, packaged, and summarized, Piketty makes this case, leaving us with his theoretical contribution: 2) the central inequality r > g, or rate of return on capital is greater than economic growth. It certainly is not empirically demonstrated that this is feature of capitalism per se, as Piketty purports, rather than a historical accident, but I do not see this as a flaw; seemingly the only way we could demonstrate it, especially in light of Piketty's laudable commitment to empirical evidence and not just conceptual or mathematical theory, would be to have a whole lot more centuries under capitalism to see what kinds of things happen (spare us that!). And what we do know is that it is happening, regardless of whether it must happen, and that rules that protect large fortunes and the fact that the more you have to invest, the better your return are the cause. Piketty demonstrates all this with data and arguments that seem cogent to a bilbo like me, and spices it up with the constant references to the novels of Balzac, Austen, Henry James and others that he uses to depict the kinds of socioeconomic structures he's talking about. Citing Balzac of course proves nothing, but it certainly helps us envision the kind of situation--a return, since all things being equal slower growth increases the power of wealth in a society--to oligarchy and "patrimonial capitalism"--that he's projecting, and it's one of the joys of this book.
Said joy makes Capital (let's call it Le Capital, please, though Piketty doesn't create or work within a parallel set of assumptions about how economics works as Marx did--one cool thing about this book is how--as far as this B.B. can see--it makes sense entirely within the assumptions of classical economics) as much a work of economic history as a theoretical contribution or a comment on policy; and as such, of course, can inform the way we understand the past and even read its literature--did you know inflation was essentially zero throughout the nineteenth century? That's how they could get away with shillings and ha'pennies. And guineas were 1.05 pounds, and were a kind of parallel unit of pay that you used at fancy restaurants and to pay for certain professional services in order to say "I'm a rich asshole"--a kind of tipping, in a sense, though also a rich asshole tax. But speaking of rich asshole taxes..., he does make one central policy recommendation, to avoid the mild dystopia r > g takes us to: 3) a progressive annual global tax on capital (starting at perhaps 0.1% on capital of $100,000 and moving to say 10% on the largest fortunes of over $1 billion, though the precise numbers are obviously secondary to the concept), combined with greatly increased income taxes at the high end. The intent would be to keep inequality under control and stop it increasing (without necessarily touching social mobility, though I know for me a society where I know my place and it's making 5/7 of what the doctor or lawyer or CEO makes is far preferable to the one where the doctor makes 15 times what I do and the CEO 300 times and increasing all the time, and my main concern is how to rocket up the social ladder and join them and sneer downward), not to remove it entirely.
This is the game-changer, and as such it is the part that has come in for controversy and criticism. But looking at the criticisms (conveniently summarized in many places online), sorry, they're a poor lot: there are critiques of the assumption that inequality matters and assertions that what's important is that absolute wealth keeps growing (without even getting into the large literature on the socially and psychologically corrosive effects of inequality, we've seen the material effects of growing inequality based on r > g in places like the real estate bubbles that are popping up all over these days: what does it matter if my dollar income keeps increasing if the price of necessities like shelter increases multiple times faster? (This also leaves aside the fact that absolute incomes are not increasing, so how much inequality would matter if they were is a moot point and the argument a red herring). Then there are basic libertarian critiques of government and redistribution, which have little to do with Piketty specifically, and you probably already know where you stand on those (yes, if you think the free market distributes income fairly and rewards people according to their deserts, you will probably not be in favour of redistribution downward, no surprise there). Then there is the major countervailing force that Piketty acknowledges, the decreasing rate of return on capital, but as long as it still remains higher than economic growth all this means is that an upper limit on equality will be set--and if you like the way society is now, that limit might be low enough for you, but it isn't for me. Then there are the tech bros who say innovation will spur growth that will overcome either a) inequality, by spurring economic growth (but we've seen how that has worked so far) or b) the deleterious social effects of inequality, by freeing us from labour robots singularity something something, but that kind of positivism is half religion and half venal self-justification and has been taken apart definitively (I think) by Evgeny Morozov. Then there are arguments like that of Acemoglu and Robinson that r > g is not an iron law but merely a matter of policies and happenstance--but, shrug, if so, all the more reason we can use policies to fix it. Their comment may be meaningful for economists engaging with this as a work of theory, but not for the rest of us wondering how to fix the problem.
And the rest of the critiques seem largely to follow this mode: his concepts could use tweaking, or he is too mathy and insufficiently theoretical, or feminist economics will flip your whole conception of what economics is about Thomas Piketty. Or here are some errors in the data that don't affect the outcome. Everybody seems to be piling on, but what nobody seems to disagree with except from some ideology-first right-wing perspectives is that a tax like Piketty's would reduce inequality and concentration of capital. And though he himself acknowledges that it would be politically impossible, for those of us who see such effects as a self-evident good, it still acts as a kind of beacon: not a "general strike for our times," given the top-down nature of the proposal and the lack of a whole worldview and engagedness and structure of action and empowerment that the general strike would have implied, but something in that direction: a benchmark against which we can evaluate policy changes and their effects and an inspiration to dream big.
The idea of free market capitalism, over the past half century, has grown from a collection of theories espoused by Adam Smith et al into an economic and political ideology, reinforced by the collapse of the Soviet Union, and supported by the economic elite whose interests it has served. The idea that capitalism ultimately benefits all participants -- that "a rising tide lifts all boats" -- is a powerful one that has been accepted by many people whose boats remain unlifted. Much of that reflects that, in the US and Europe, almost everyone between 50 and 70 did grow up in a world where the tide did rise, and most boats rose with it, with income inequality falling drastically compared to pre-war levels. That improvement is very widely assumed to be the result of a capitalist economic system. This is the central "fact" that Piketty demolishes, showing that the 1945-75 period (the thirty glorious years, for the French) reflected economic recovery from the war and political decisions that levelled income distribution.
Rather than the thirty glorious years being the base state, Piketty argues, they were an aberration from the underlying pattern of capitalism, which is that income inequality -- and far more important, wealth inequality -- tends to grow strongly over time. Most of the book is about the data that he uses to arrive at this conclusion, data that were NOT easy to obtain. Indeed, Piketty's achievement in constructing his data base is just as important as his conclusion. Heretofore, we have been discussing inequality almost exclusively as an income phenomenon: what Piketty brings into the discussion is the question of wealth. Not only does he bring it in, he makes it possible to measure it. (Note: most of the reasonable criticism of Piketty so far -- I don't think that yelling Markist! is reasonable criticism -- has focussed on the data. Piketty, in the book, warns over and over of possible data weaknesses, and has made his data available on line. There will be problems, there are always problems with data. But disagreeing with a few data assumptions does not invalidate the argument).
Based on this data, Piketty arrives at his central argument -- that when the rate of return on capital (very broadly defined) exceeds the growth of national income, when r is greater than g, wealth will become more concentrated. In the 50's and 60's, when economies were speeding ahead at 3-5% based on recovery from the war (and from the Depression) and when inflation was low, r was not necessarily greater than g. Since then, however, growth in the advanced countries has slowed sharply, while the return on capital has remained at 5% or better. The result is an increasing concentration of wealth, and Piketty sees no reason why this should change (The US has a special aspect which Piketty examines -- the dramatic increase in income inequality, as high-end wages have soared relative to average wages. This is of interest, but the key point remain r>g
To deal with this, Piketty proposes an international, progressive tax on wealth. That looks improbable at present, but, as he notes, a meaningful income tax looked pretty improbable a century ago. I don't think, however, that Piketty's proposed solution is critical -- what matters is the discussion he has brought to the fore. The essential point is that the state (really a group of states( is the only entity that can offset the concentration of wealth implicit in modern capitalism. Destroying capitalism doesn't work: consider the Soviet Union. But its benefits can be spread more widely by political means (taxes) while leaving the economic motor in place. Ultrahigh taxes, remember, do not seem to have deadened entrepreneurship from 1950 to 1975.
This is not light reading, though it is remarkably free of economic jargon (as a former economist, I am an expert on that topic). But it is well worth the time and effort it demands. It is already playing a major role in the discussion on inequality and its political ramifications, and has certainly changed my thinking on the subject. This is a very major work.
Even though anything that can’t go on forever won’t, he suggests, the richest can soak up so much of a society’s wealth for so long that the rest of us are immiserated, and the existence of a “middle class” is a historical anomaly produced by the great destruction of capital in the world wars—including the destruction involved in decolonization—as well as progressive taxation; now that both of those are over, the ideology of meritocracy is inducing us to ignore massively increasing inequality, now greater in the US than in most other countries and than it has been since records were kept. The twist, such as it is, is that it’s now possible to generate huge fortunes not just from returns on capital but also from what we would call “labor”—athletes and actors, though, generally can’t rise to the highest levels of wealth, though financiers can. The use of novels such as Jane Austen’s to examine what wealth meant in previous periods is fun, but it isn’t exactly a peppy read.
His solution is to tax capital income no matter where it comes from. Because only labor is really taxed those don't work not only skip on taxes but get all the services for free that the rest of us pay for (e.g. roads, security, innovation, etc). To really drive it home, the great, great grandchildren of the person who came up with the idea that made billions will never work but still be a drain on society. Is there a reason why someone who never met their great, great grandfather should take a free ride on all the things a society provides while those struggling to make ends meet cover for them? Good Point. I think his study on college endowments as an example of how money can grow if you have more of it was very good.
Piketty compiles data on capital and income going back decades and for a few countries a few hundred years. What he finds is a trend of growing inequality in both wealth accumulation and
Obviously, WWI and WWII were a massive destruction of human life. They also eradicated an enormous amount of accumulated capital and dramatically reduced a large inequality that had developed in the early part of the twentieth century.
In the twenty-first century, the inequality is growing. Piketty has the data to show it.
- his main point is that the top 1% own too much and this is bad. He leads you to believe that the top 1% is stable and self perpetuating - the kids of the current 1% inherit and join the 1%. But, and this is a big but, he has no data to support this. If there is churn in the 1% - rags to riches to rags in three generations - then many of his concerns are much less valid.
- he uses the French Revolution as background noise - "when the situation is intolerable, the people will rise" sort of thing. But while the top 1% now may have similar percentages of the wealth as then, and the bottom 50% may have almost none of the wealth, the situation of the bottom 50% is vastly different now from 1789. The ordinary person now has access to food, health care and education. They have opportunities that were not available to the peasants in France. I may think it ridiculous that some bozo is a multi billionaire, but I can't see me being moved to revolutionary fervour by it.
- his "one big idea" for addressing the problem of an over-concentration of wealth is a progressive tax on capital. Fine idea. Can we start tomorrow? But, as he points out, with the mobility of most capital, this tax can only work with almost universal sharing of banking and financial information. Yeah, right! And, in fact, if such a tax was introduced without universal information sharing, the people who would end up paying most of it would be owners of real estate - the new propertied middle class as he calls them. The ultra rich wouldn't be paying too much in such a tax. As he pointed out in his analysis of the rate of return for the different university endowments, the more money you have, the more money you can make. And, while he didn't say this, it is equally true - the less tax you will pay.
Read June 2015
“This inequality expresses a fundamental logical contradiction. The entrepreneur inevitably tends to become a rentier, more and more dominant over those who own nothing but their labor. Once constituted, capital reproduces itself faster than output increases. The past devours the future.”
His recommended solution is stated simply: “The right solution is a progressive annual tax on capital.” Ideally this would be a global tax on capital, requiring all nations to cooperate in sharing banking data, and working to assess and collect this tax. The argument and evidence are bulletproof; the remedy is hard to argue with, yet harder to put into place. “The difficulty is that this solution, the progressive tax on capital, requires a high level of international cooperation and regional political integration. It is not within the reach of the nation-states in which earlier social compromises were hammered out.”
He makes other recommendations regarding the role of government in establishing a social state, progressive income tax, and public debt.
This book provides a modern checkup on capitalism. Identifying a systematic disequilibrium provides insight into an important cause of income inequality. Blaming imperfect competition, lazy workers, or government policy only distracts us from solving the real problem.
The World Top Incomes Database was built to provide “the most comprehensive set of historical series on income inequality available so far” to use as source data for this book. The extensive set of figures and tables used in the book are freely available on the book’s official web site.
Thomas Piketty’s careful use of representative data serves as a model for other economists to follow. He shows us how to progress beyond cunning use of anecdotes or reciting economic ideology. Only careful use of representative data provides the insights we need to improve our economies and well-being.
The arguments made in this book are clear, complete, and representative. The evidence used to support arguments and explore counterarguments is unprecedented. He entertains us with stories from the period novels of Jane Austin and Honoré de Balzac. The translation from the original French-language publication is so skillfully done it seems invisible.
The entirety of the book is in showing what this
5 stars oc
In my opinion, capital concentration is not inherently bad; it is the impacts of such concentration that I worry about. These impacts include the possibility of undue political influence, a sub-optimal allocation of resources and "growth" without job creation or real productivity gains.
A tax on capital is not the only way to attack these kinds of problems. And a key question is whether we want to focus on reducing the wealth of the 1% or helping the other 99% of the population. If capital were more highly taxed, what should/could governments do with the extra revenue: offset other taxes, initiate new or expanded social programs, and/or pay down national debt?
In talking about the 1% of the population who control much of the world's capital, Mr. Piketty ignores any discussion of gender equity or wealth held by members of minority communities within nations. He also largely ignores China/India and how their growth could affect wealth distribution.
What I liked about this book is the author's idea that economists must partner with historians and other social scientists to really make a contribution to our understanding of the world's problems and potential solutions. I also liked his measured tone. And, I appreciate that he has invigorated discussion on an important issue.
Like a lot of economics books, this one is pretty dry. The first 300 pages tend to belabor the obvious, repeating the same information, and displaying it in redundant charts, and then reaching startling conclusions such as
So what's the big take away from this book? Well, essentially I think it's that capitalism has taken over democracy. Money makes money faster than labor does. The political policies put in place in the last half century favor wealth-holders over wage-earners. The rich are getting richer and workers are getting nowhere. Things used to be different. Regulations and taxation between the end of WWII through the late 1970s mitigated the worst abuses of runaway capitalism. This has changed since, though, and the new situation is unsustainable. It would be a good idea to try to change things to ensure that the wealth of nations isn't so disproportionately distributed to the wealthy in those nations before the whole thing falls apart. There are a lot of bad ways to do this, but the least bad would be a progressive tax on wealth. I wish I could say there was a remote chance of this happening, but I can't, at least not until worse options have been tried and allowed to fail.
Politicians worldwide should read and implementing his recommendations. Otherwise the endless cycles of boom and bust that plagued the 19th and early 20th centuries will plague this century.
Piketty takes the reader on a journey from the beginnings of the capitalist system to the latest crash. He explains the hows and whys of the situation in a most understandable manner and never stands upon his superior knowledge. If you have wondered to whom the whole world owes fiscal amounts beyond comprehension, then you will be both made wiser and more irate at the shocking answer. You will also learn the reasons for and the weaknesses within the creation of the European Monetary Union, the truth about austerity and the simple, but politically unlikely steps which are needed to rebalance the World's finances.
Piketty rates economics as a social science: he accepts that it does not possess the definitive accuracy of mathematics or physics which would allow him to call it a full science and, it is this modesty which helps to make this a readable work. The author is not dictatorial and very patiently explains to fiscal illiterates, such as myself, basics which must be second nature to him.
Whether you have any political inclinations, or not, I would strongly recommend that you obtain and persevere with this book. We are all affected by this financial crisis and it is good to be able to put it into perspective, rather than to parrot a political parties half baked views.
I have two major negative points. I didn't understand was his discussion of a budgetary parliament in Europe. After all, if a European-level body controls all the national budgets would that body essentially control practically 90% of policies as well? At the same time, I think there is a disconnect between the European Central Bank & the Euro and national-level monetary/fiscal policy. A budgetary parliament would address this. Secondly, I have severe doubts about how realistic his proposal is for a global wealth tax and automatic sharing of all banking information.
While I do not agree much with Picketty's politics, I found the data illuminating.